South Africa’s 2025 budget speech: key takeaways and impact on taxpayers

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With a multitude of options to choose from, which fund should you select and why? With or without a financial advisor, the fund selection process can be overwhelming with several factors to consider, such as past performance, fees, track record and fund size. One of the most impactful but overlooked factors relates to the geographies in which the investments generate their revenue. Regulation 28 compliant funds are permitted to allocate up to 45% to offshore investments, previously 35%, but is there a way to maximise this further? Many funds do not deviate significantly from their benchmark and ultimately underperform once fees have been deducted. High Street Asset Management differentiates itself by employing an extreme offshore bias by taking full advantage of the 45% offshore allocation and, then, selecting locally-listed stocks with significant foreign revenue streams.

Stock markets can be highly unpredictable and the price which investors pay for a share can deviate significantly from the company’s fair value. However, over longer periods, the picture becomes clearer, with share prices reflecting the company’s cash-generating ability. Most businesses and their ability to produce profits are highly susceptible to the economy in which they operate. From 1995-2023, South Africa (SA) produced a satisfactory annual economic growth rate of 2.4%, which equalled that of the United States (US) over the same period.

Consequently, the local equity market (JSE All Share Total Return Index) accounted for this growth and has risen by 12% per year, including dividends. This annual return is over 6% ahead of inflation and would be considered acceptable for most retirement savers. The chart below shows the total returns, both in Rands, of the local market against the major equity market in the US (S&P 500 Total Return Index) shortly after attaining democracy in 1994.

Source: Bloomberg (23/06/2023)

Until recently, the local market had outperformed the US equity market; a notable achievement given the US has been a difficult benchmark to beat. Buoyed by surging commodity prices, the SA market was amongst the top-performing markets in the world over a sustained period. However, over the past decade, local economic growth has slowed to just 1% per year and diverged from the sustained growth seen in the US.

Source: Bloomberg (23/06/2023)

Not surprisingly, the divergence in economic fortunes has been mirrored in the financial markets with the US outperforming the local market by a staggering 339%! Many of the issues that have caused this dislocation, from corruption to ongoing load shedding, have been well documented.

Source: Bloomberg (23/06/2023)

Two of the largest locally-listed companies, Naspers/Prosus and Richemont, derive almost all their income from offshore operations and their share prices have increased sharply over the last decade. They account for a significant portion of the local market and have been responsible for lifting the index’s performance. Despite the SA market significantly underperforming the US, if one were to remove these two behemoths from the index, the performance looks considerably worse. 

Recent poor performance can be attributed to locally-focused SA companies who are largely dependent on the local economy to support revenue growth. The extent of this extreme underperformance can be illustrated by the recent performance of the largest companies within sectors that are notoriously sensitive to the local economy. The figures below reflect the difficult operating environment that these companies have endured over the past five years as the economy has stalled. When converting the Rand returns into US Dollars, the value destruction in global terms becomes apparent.

Source: Bloomberg (23/06/2023)

Some market participants believe that the decline in share prices of locally-focused companies fail to reflect the company’s prospects and their share prices are set to rise following years of stagnation. Others are of the opinion that the current share prices accurately reflect the local environment and the economic outlook does not justify a recovery of any nature. Depending on a retirement saver’s stance on the matter, one should consider their fund’s offshore allocation and its vulnerability to the Rand exchange rate. 

Many funds cater for a local recovery but few cater for retirement savers who want to maximise offshore exposure. High Street applies its mandate consistently and will always aim to deliver a fund with a 90%+ offshore bias while remaining compliant with retirement regulation. For retirement savers who believe that offshore markets will continue to outperform the South African market over the long term, you might wish to consider the fund’s unique and enhanced offshore bias.

High Street Asset Management is an offshore and Rand-hedge investment specialist managing a retirement compliant fund that maximises offshore exposure and minimises local risks. It has a track record of strong performance during bouts of Rand weakness. For more information, see www.hsam.co.za. DM

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How to invest when the rand is getting weaker

South Africans have become used to the rand’s volatility, but the past few months have been a crazy, white-knuckle ride for even the most experienced investors.

The reasons for the currency’s weakness against the dollar are varied – rising global inflation and concerns about a global recession are just two of them. Both these factors mean that investors have been buying dollars, which are seen as a safe haven, and selling emerging market currencies like the rand. And when there’s a sell-off in the rand, the value of the currency drops.

“It is likely that the rand will always be more volatile than developed market economies due to various risks associated with emerging markets. However, volatility is not always constant and tends to change through time,” says DMA’s Charlotte Van Tiddens.

The bottom line is that these ‘macro-economic’ factors behind the rand’s weakness are beyond the control of individual investors. But knowing that there’s nothing to be done about a falling rand doesn’t really help when you see your hard-earned cash losing its value against a super-strong dollar, and your investments starting to shrink in global terms.

The secret to staying one step ahead and securing some financial peace of mind lies in understanding what strategies can protect your investments; and using this knowledge this to your advantage so that you know how to invest when the rand is getting weaker.

Winners and losers

A weaker rand is going to positively or negatively affect local companies, which in turn will affect their share prices – and your investments. If you’re the kind of investor who buys shares in individual companies, bearing this in mind and asking the question, ‘Who stands to gain when the rand is weak?’  can be helpful when deciding which shares you want to invest in.

For some businesses a weak rand is good news, particularly if they are exporters. That’s because they receive dollars for the products that they sell, and so when the dollar price is high, they’ll receive more money in rand terms. But there’s always a downside, right? A weaker rand is generally not good for companies that import products. Because they have to buy products in dollars, they’ll be spending more rands when the dollar goes up and the rand goes down. Prices of their products get hiked, and consumers end up buying less of them. Not good for the bottom line or the share price.

Research shows that when the rand is weaker, as it is now, companies that offer communication services and consumer staples tend to be better off. On the other hand, companies that focus on real estate or those that depend on consumer discretionary spending (in other words, spending on non-essential items) tend to be worse off.

Take it offshore

The other critical component for a South African investor is to ensure that a portion of your portfolio is invested offshore – or not in your country of residence. This is exactly for the reason that because offshore investments are not rand-denominated, they are protected against the currency’s devaluation.

There are an increasing number of ways for South African investors to get offshore exposure.  You can literally move your money offshore by exchanging your rands for a foreign currency and in turn investing this foreign currency into offshore domiciled shares or funds. This can be very admin-intensive and involve factors like exchange controls or tax-clearance certificates etc.

A more straight-forward option can be to invest in local funds that provide offshore exposure. These would include unit trusts that have underlying investments in international companies, or locally listed feeder funds such as the array of ETFs that one can buy on the JSE that track an offshore basket or index. What’s great about these ETFs and feeder funds is that they don’t require large initial investment amounts, so even if you only have a small amount of money you can still have access to investment opportunities.

It can also be comforting to know that even if you’re investing in big South African companies rather than taking your money offshore, you’re often likely to be protected against a weak rand. Many South African listed companies are “rand-hedged”, or protected against the ups and downs of the local currency.

“These companies generate the bulk of their revenue in foreign currencies like the dollar. Their expenses are not incurred in rand either. When the rand weakens and loses value, all else equal, their rand profit increases. Examples of rand hedges include the tobacco and luxury goods sectors and include stocks like British American Tobacco and Richemont,” says Van Tiddens.

Other examples of rand-hedge stocks are Aspen, BHP Billiton and Glencore.

Make sure you mix it up

As always, that classic investing mantra “Diversify Diversify Diversify” applies, and even more so when you’re wanting to invest when the rand is weak.

There are so many moving parts to the investment landscape, and unless you are a full-time investing expert it can be extremely complex to keep a handle on all the factors affecting the value of your investments. Bearing that in mind, one of the most important ways to protect the overall value of your investments is to make sure that they are diversified – in other words, exposed to a variety of asset classes, such as cash, equities (shares) and property so that you don’t have all your eggs in one basket.

This helps to spread the risk, and means that when one asset class is under pressure or under-performing, the other assets are not affected.

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